Economic assistance to small and midsize businesses and nonprofits

Federal COVID-19 Response Legislation and Charter Schools

Legislative Topics

The CARES Act includes a number of programs designed to help small and midsize businesses and nonprofits affected by COVID-19 and related closures remain in business and continue to pay their employees. Many of these benefits are available to nonprofits and self-employed individuals, as well as small businesses. As a result, some charter schools may also be able to take advantage of them. Charter schools that wish to take advantage of these programs should act quickly, but should also carefully review the eligibility requirements and benefits of various available programs, to ensure that they meet requirements and because participating in some economic assistance programs prevents employers from accessing others.

Paycheck Protection Program Small Business Administration Loans

Please note: The Small Business Administration resumed accepting PPP applications from participating lenders on April 27, 2020.

This program provides short-term, forgivable loans that small businesses, sole proprietorships, and 501(c)(3) nonprofits can use to cover ongoing operations and prevent layoffs during the coronavirus public health emergency. Eligible borrowers can access up to 2.5 months of payroll costs, rent, utilities, and interest on debt obligations (up to $10 million). Payment on loans is deferred for six months, and loans can become forgivable if the organization keeps staff on payroll during the loan period, essentially turning the forgiven part of the loan into a grant. At least 75% of the forgiven amount must have been used for payroll costs. If the loan, or a portion of the loan, is not forgiven, the interest rate is 1% and the loan term is a maximum of two years with no prepayment penalty. Borrowers who take out these loans do not need to provide personal guarantees required for other SBA loans, or demonstrate that they are unable to access credit elsewhere.

Borrowers seeking Paycheck Protection loans must apply through banks or other approved SBA lenders (not directly through the SBA). The CARES Act provided $349 billion in loan funding, to be given out on a first-come, first-served basis starting April 3. The Paycheck Protection Program and Health Care Enhancement Act, which became law on April 24, provides an additional $310 billion in loan funds for this program.

Implications for Charter Schools

These loans may be an appealing option for charter schools that are struggling to cover expenses or have concerns about economic uncertainty due to COVID-19. However, there are some caveats that charter schools interested in these loans should understand. In order to qualify for these loans, borrowers will need to confirm and, if asked, be able to prove:

It is a nongovernmental entity.

The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.

The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments.

The borrower does not have an application pending for another loan duplicative of the same purposes and amounts, and has not received such a loan between Feb. 15 and Dec. 31, 2020.

It’s currently unclear if SBA will permit all charter schools to qualify for these programs since state law treats charter schools’ nongovernmental status differently and SBA has not issued clear guidance specific to charter schools. Under SBA rules for these loans, borrowers bear exclusive responsibility — and liability — for determining their eligibility. Charter schools interested in pursuing these loans should consult with their attorneys and state advocates to examine their specific circumstances.

Economic Injury Disaster Loan

Under the CARES Act, nonprofits, along with small businesses and sole proprietorships, in all of the United States can apply for Economic Injury Disaster Loans to help them overcome a loss of revenue due to COVID-19 and related closures. Borrowers can also apply for an advance of up to $10,000 that is available immediately upon successful application and does not have to be repaid. Loans offer low interest rates and terms of up to 30 years to keep payments affordable. Borrowers apply directly to the Small Business Administration for EIDL. EIDL and PPP loans cannot be used to cover the same expenses.

Implications for Charter Schools

Economic Injury Disaster Loans have requirements and certifications similar to those that apply to Paycheck Protection Program loans. Thus, the same cautions also apply to charter schools interested in pursuing these loans and advances, and charter schools should exercise caution if they intend to pursue both types of assistance. Charter schools interested in pursuing these loans should consult with their attorneys and state advocates to examine their specific circumstances.

Nonprofit organizations have the option of paying unemployment insurance taxes or self-insuring. Nonprofits that choose to self-insure must repay their state unemployment insurance trust for unemployment benefits claimed by laid-off employees. The CARES Act provides nonprofit organizations and government entities a federal reimbursement for half of their costs for these unemployment benefits from March 13, 2020 through Dec. 31, 2020.

Implications for Charter Schools

If a charter school as a nonprofit or government employer self-insures rather than paying unemployment insurance taxes, it can benefit from reimbursement of half the costs for unemployment benefits claimed by laid-off employees during this time period.

Employee Retention Credit

The CARES Act allows many employers to take a credit against the 6.2% employer contribution to Social Security payroll taxes for wages paid to staff between March 12, 2020 and Jan. 1, 2021. Employers that receive forgivable loans through the Paycheck Protection Program (described above) cannot also take the employee retention credit. An employer that receives employer tax credits for sick and family leave wages (as discussed above) can still claim the employee retention credit, but may not include those sick and family leave wages in the amount of employee retention credit the employer claims.

In order to qualify for the credit in a given quarter, employers must either be required by government order to suspend their business, or have gross quarterly receipts that are at least 50% less than the same quarter in 2019. Credits are worth up to $10,000 per employee for all calendar quarters (meaning the maximum credit is $5,000 per any one employee). Employers with 100 or fewer employees can claim the credit for all employees, but those with more than 100 employees can only claim the credit for employees who were paid during a quarter but could not work due to COVID-related closures. This is a refundable credit, meaning that employers can get the full benefit of the credit even if they do not have sufficient payroll tax liability. Employers that do not have sufficient payroll taxes can also request an advance to cover qualified wages.

Implications for Charter Schools

This credit is available to business and nonprofit employers, but not to government employers or sole proprietors. Since state law treats charter schools’ nongovernmental status differently, it is not clear whether charter schools are eligible for this credit. Charter schools interested in taking this credit should consult with their attorneys and state advocates. Because governors in 46 states have ordered school closures, most charter schools will meet the requirement of being mandated by government order to suspend business.

Delay of Payment of Employer Payroll Taxes

The CARES Act allows employers, including nonprofits and self-employed individuals, to delay paying the 6.2% employer contribution to Social Security payroll taxes that would normally be due for wages between March 27, 2020 and Dec. 31, 2020. Employers who elect to do this will have to pay back the unpaid taxes (without interest) over the following two years: half due Dec. 31, 2021 and half due Dec. 31, 2022. This option is available to any employer, regardless of size, but cannot be used by employers that have SBA loans that are forgiven through the Paycheck Protection Program.

Implications for Charter Schools

Charter school employers that do not use the Paycheck Protection Program may be able to use this provision to delay payment of employer taxes, but benefits may be limited if their required payroll tax payments are small because their teachers who participate in the state teacher pension program do not participate in Social Security. Charter schools should communicate with their payroll providers, since they usually handle this automatically.

Changes to Charitable Contributions

The CARES Act allows individuals who do not itemize their taxes to deduct $300 in charitable contributions directly from their adjusted gross income for tax year 2020, and increases limits on charitable contributions by individuals and businesses for tax year 2020.

Implications for Charter Schools

Charter schools that fundraise from individuals may wish to remind current and prospective donors of these provisions, as an incentive to give (or increase giving amounts) in tax year 2020.

Emergency Relief and Taxpayer Protection Program

In addition to the above programs, which provide direct financial assistance to small businesses and nonprofits, the CARES Act authorizes the Secretary of the Treasury to make up to $500 billion in loans, loan guarantees, and other investments in support of eligible businesses, states, and municipalities. Of those funds, $454 billion is designated for the creation of programs through the Federal Reserve that support lending to eligible businesses and nonprofits with 500 to 10,000 employees, as well as states and municipalities.

Implications for Charter Schools

Although few, if any, charter schools are likely to directly benefit from these programs, charter schools may indirectly benefit if the liquidity provided to states helps them navigate economic and fiscal challenges due to COVID-19 and continue to support public education, including charter schools.